Colombia - Chivor Hydroelectric Project

RESTRICTED Report No. P - 817 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO INTERCONEXION ELECTRICA S.A. WITH THE GUARANTEE OF THE REPUBLIC OF COLOMBIA May 13, 1970  lI1T1RA.VTIONAL BANK FOR RECONSTRUCTION LAD DEV1LO0P14ENT REPORT AND RECO14EaNDATION OF THE PRESIDENT TO THE (EXCUTIVE DIRECTORS ON A PROPOSED LOAN TO INTERCONExION ELECTRICA S. A. WITH THE GUARANTEE OF THE REPJBLIC OF COLOnBIA 1. I submit the following report and recommendation on a proposed loan in an amount in various currencies equivalent to US$52.3 million to Interconexion mlectrica, S.A. (ISA) for the Chivor Hlydroelectric Project. PART I - HISTORICAL 2. The Bank has contributed to the financing of power development in Colombia for twenty years, concentrating on the systems serving the cities of Bogota, Cali, Medellin and Manizales. Thirteen loans with an aggregate initial principal amount of about US$216 million have been made to these four systems, which presently produce some two-thirds of all the electric power generated in the country. A study completed in 1964 showed that interconnecting these regional systems to create a national system would result in significant economies by permitting the deferral of some investments and the more rapid utilization of others. ISA was created in September 1967 as a vehicle for this interconnection and for developing and operating major new generating plants required by the interconnected system. ISA's first project was a network of transmission lines and substations which is presently under construction with the assistance of Bank financing under Loan 575-CO. ISA and the Government have now requested Bank financing for the proposed Chivor Hydroelectric Project, ISA)s first venture in the field of power generation. 3. A Bank mission appraised the proposed loan during August- September 1969, and negotiations were held in Tlashington during March 16 - 19, 1970. ISA was represented by the General Manager, Dr. Piedrahita, by the Administrative Sub-1Manager, Mr. Calder6n, and by officials of its principal shareholders: Mr. Borrero (Empresa de Energia El6ctrica de Bogot&), Mr, Aristizabal (Empresas PIublicas de Medellin), Mr. Zuleta (Instituto Colombiano de Energ{a El6ctrica) and Mr. Mazuera (Corporacion Aut6noma Regional del Cauca). The Colombian Government was represented by Mr. Barrera of the National Planning Department.  -2- 4. The proposed loan, which would be the forty-second made to Colombia, would increase the total amount of Bank loans to Colombia to US$709.1 million (net of cancellations), of which US$485.7 million is now held by the Bank. IDA has made one credit of US$19.5 million for high- ways in Colombia. The following is a summary statement of Bank loans and IDA credits to Colombia as of April 30, 1970: Loan or Amounts (Us$ Million) Credit No. Year Borrower Purpose Bank IDA Undisbursed Fully disbursed loans and credits - 313.7 19.5 345 1963 Acerlas Paz del Rio, S.A. Steel 30.0 1.0 369 1964 Empresas Priblicas de Medellin Power 42.0 11.2 448 1966 Government Agriculture 16.7 6.1 451 1966 Banco de la Republica Industry 25.0 2.1 499 1967 Empresa Nacional de Cormuni- Telecomunicaciones cations 16.0 9.4 502 1967 Instituto Colombiano de la Reforma Agraria Irrigation 9.0 8.1 534 1968 Banco de la Republica Industry 12.5 5.5 536 1968 Empresa de Acueducto y AlcantariUado de Ilater Bogot& Supply 14.0 8.4 537 1968 Empresa de Energta El6ctrica de Bogota Power 18.0 9.8 550 1968 Government Roads 17.2 11.3 551 1968 Ferrocarriles Nacio- nales Railways 18.3 16.3 552 1968 Government Education 7.6 6.5 575 1968 Interconexion El6ctrica, S.A. Power 18.0 13.5 624 1969 Government Agriculture 17.0 16.9 625 1969 Banco de la Repiublica Industry 25.0 24.8 651* 1969 Government Agriculture 18.3 18.3 Total (less cancellations) 618.3 19.5 of which has been repaid to Bank and others 130.4 Total now outstanding 487.9 Amount sold: 17.5 of which has been repaid 15.3 2.2 Total now held by Bank and IDA 485.7 19.5 Amount undisbursed 169.2 - 169.2 * Loan not yet effective.  - 3 - In addition to the loans listed above, the Executive Directors approved on May 12, 1970, a loan of US$6.5 million to the Republic of Colombia for the Second Education Project and a loan of US$32 million to the Republic of Colombia for the Sixth Highway Project. 5. The status of disbursements on loans is described in paragraph 5 of my Report and Recommendation on the loan for the Second Education Project (P-799), dated April 30, 1970. 6. IFC has made 34 investments and underwriting commitments in seventeen enterprises in Colombia totalling US$17.9 million (net of cancellations). PART II " DESCRIPTION OF THE PROPOSED LOAN 7. Borrower: Interconexi6n Electrica S.A. Guarantor: Republic of Colombia. Shareholders and Empresa de Energia mlectrica de Guarantors: Bogota Empresas PGblicas de Medellin Corporacion Autonoma Regional del Cauca Instituto Colombiano de Energia Electrica Purpose: To assist in financing the first 500 YNJ phase of the Chivor hydro- electric power plant and related transmission facilities. Amount: The equivalent in various currencies of US$52.3 million. Amortization: In 30 years, including a 7-year period of grace, through forty-seven semi- annual installments beginning December 15, 1977 and ending December 15, 2000. Interest Rate: 7 percent per annum. Commitment Charge: 3/4 of one percent per annum.  PART III - THE PROJECT 8. A detailed description of the Project-is given in the attached report, entitled "Interconexi,on Eaectrica S.A.; Chivor Hydroelectric Project - Colombia" (FPU-31a). 9. At the end of 1968, the total installed generating capacity in Colombia was 1,940 )tOJ, including 250 14W in privately owned plants. In the last 12 years, energy demand has increased at an average annual rate of 11 percent, which is expected to be maintained, if not exceeded, in the next decade. To correct a tendency towards fragmented, small- scale development, powxer plants are now being grouped in six zones, wjhich-will eventually be interconnected by high voltage transmission lines. This is expected to permit the realization of economies of scale through the construction of larger plants. The keystone for this development will be the system of the proposed Borrower and executing agency, Interconexi6n Electrica S.A. (ISA). 10. These developments have been accompanied by substantial im- provements in power tariff policy. In December 1968 the Government instituted the Junta Nacional de Tarifas de Servicios Publicos to regulate public utility tariffs so as to permit reasonable returns on revalued assets and the orderly financing of expansion. Rates have been regulated at adequate levels in the larger companies; and it is hoped that rates will in due course become more remunerative for the smaller companies as a result of the work of the Junta. 11. ISA, a stock company, was established in 1967. Its principal shareholders are the major power companies of Colombia, namely Empresa de Energia El6ctrica de Bogota, Empresas PNblicas de Medell:tn, Corpo- racion Aut6noma Regional del Cauca and Instituto Colombiano de Energia Electrica. ISA's purposes are to interconnect the electric systems of its shareholders and to construct, own and operate major new generation plants required by the interconnected system. The Bank and joint lenders participated in the financing of ISA's first project consisting of a network of transmission lines and substations presently under construction and expected to be completed by mid-1971 (Loan 575-CO). 12. By mid-1975, ISA's interconnected system will need a major addition to generating capacity in order to meet the rapidly growing demand. The evaluation of several alternative generation programs by ISA and its consultants, and by the Colombian National Planning Department, indicates that the construction of the Chivor Hydroelectric Project would be the most suitable and economical means to meet this need. The Bank concurs in this judgment. The Project would be located about 120 km northeast of Bogota, It would have an ultimate capacity of about 1,000 MW. The proposed loan would help finance the first stage, of 500 NW which is to be started in 1970 and come into commercial operation in mid-1975. The annual generation of the plant in an average  hydraulic year would be 3,477 GTqh. The Project wou14 include a dam on the Bata River, a pressure tunnel and penstock, a powerhouse on the Lengupa River, and a 230 KV transmission line, 130 km long, to link the Chivor plant with the interconnection network. 13. The total construction cost of the Project is estimated at US$114.2 million, excluding interest during construction, with a foreign exchange component of about US$65.7 million. The proposed Bank loan would cover the foreign exchange cost of the civil works contracts, minor equipment orders, engineering and interest and other charges on the loan amounting to US$9.4 million. ISA will arrange bilateral financing for the foreign exchange costs of the major equipment orders; it is expected to have no difficulty in obtaining this financing on suitable terms in time to carry out the Project as scheduled. The local currency cost of the Project, and the interest charges during construction on the bilateral credits, would be financed by the four sponsors in proportion to their agreed participation in the output of Chivor. The financial plan of each principal shareholder indicates that this financing is feasable. Two shareholders depend in part on Government financial support; satisfactory assurances have been received that the necessary Government funds will be provided. Earnings of ISA are estimated to cover interest on its debt about twice; in addi-tion there is subs-tantial cover provided by the earning power of the shareholder guarantors. 14. All contracts and orders financed by the Bank would be awarded on the basis of international competitive bidding. Prequalification of contractors for the main civil works contract has been completed, and bidding is presently underway. At the request of the Government, domestic manufacturers of equipment, which are expected to compete for minor auxiliary and miscellaneous equipment orders financed by the Bank loan, would be granted a margin of preference equal to the existing customs duties, or 15 percent of the CIF price of such equipment, whichever is lower. The minor equipment orders which may be awqarded locally under this preference could total up to about US$850,000 equivalent, of which about US$600,000 equivalent would be the foreign component. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 15. The draft Loan Agreement between the Bank and Interconexion Ilectrica S.A., the draft Guarantee Agreement between the Republic of Colombia and the Bank, the draft Shareholders' Agreement between the Bank and the four major Shareholders of the proposed Borrower, as well as the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement and the text of a Resolution approving the proposed loan, are being distributed to the xcecutive Directors separately.  -6- 16. The draft Loan Agreement contains covenants generally used for power projects. Section 5.13 repeats the rate of return requirement on power generating assets in Loan 575-CO. Section 5.11 provides for a revision of ISA's statutes to take into account the recommendations arising from a study of accounting and pricing methods. Modification of these statutes without prior approval of the Bank, and failure of the Shareholders to comply with the provisions of the statutes, are specified in Section 6.02 as additional events of default. 17. The draft Guarantee Agreement is similar to previous guarantee agreements with the Republic of Colombia. Under the draft Shareholders' Agreement the principal Shareholders would agree to guarantee the Bank loan (Section 2.01), to provide the financing of the local costs of the Project (Section 3.01), to perform-their financial obligations under ISA's statutes (Sections 5.01 and 5.02) and to assist ISA in obtaining external financing for the major equipment and its installation (Section 5.04). PART V - THE ECONO0IY 18. A summary of recent economic developments and a favorable conclusion regarding Colombia's creditworthiness for additional external borrowing was contained in paragraphs 15 - 20 of my Report and Recommendation on the Loan for the Second Education Project (P-799), dated April 30, 1970. PART VI - CONPLIAICE WITH THE ARTICLES OF AGREa1ENT 19. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VII - RECC'I=ENDATION 20. - I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President by J. Burke Knapp Attachments lWashington, D.C. Mray 13, 1970